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DOWNSTREAM MERGERS AND UPSTREAM INVESTMENT *
Author(s) -
FAULÍOLLER RAMON,
SANDONÍS JOEL,
SANTAMARÍA JUANA
Publication year - 2011
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2010.02209.x
Subject(s) - downstream (manufacturing) , merge (version control) , monopolization , upstream (networking) , industrial organization , economics , revenue , incentive , profit (economics) , upstream and downstream (dna) , microeconomics , monetary economics , competition (biology) , business , finance , operations management , computer network , ecology , biology , computer science , information retrieval , monopoly
In this paper, we show that downstream mergers increase the incentives of an upstream firm to invest in cost‐reducing R&D. The upstream firm revenues increase with industry profits, which in turn increase with concentration downstream and this explains the positive link between concentration and investment. This effect is so important that it outweighs the negative effect on prices because of lower competition. Therefore, in our context, horizontal mergers are pro‐competitive. Furthermore, downstream firms find profitable to merge: monopolization is the outcome of a standard merger game even for very unconcentrated industries.